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USD
Friday’s payrolls showed the US economy added 303k jobs in March, up from 270k the month prior and significantly above consensus expectations of 214k. Although the participation rate also increased 0.2pp to 62.7%, this wasn’t enough to offset the overall increase in employment. This left the unemployment rate to drop back down to 3.8%. While the details of the report were somewhat softer, with most of the jobs added in public sector and healthcare roles whereas interest-sensitive industries saw job growth track or undershoot historical averages, the headline figures were enough for a market already concerned that strong US growth could further derail the Fed’s plans to cut rates.
In the bond market, the stronger US growth picture combined with renewed supply concerns in commodity markets to take yields back to their year-to-date highs; levels that have once again been broken this morning. While this initially spurred the dollar higher, the stronger equity backdrop tempered the bullish move, leaving the dollar 0.2% lower on the week.
While the greenback struggled to consolidate its payrolls rally and the move higher in yields, we don’t think this is suggestive of an underlying reluctance in FX markets to add dollar length at current levels. Some of the key restrictions to the dollar’s climb higher – EURUSD breaking back into and below the 1.07 region, USDCAD climbing above 1.3620, and USDJPY breaking through 152 – could easily be broken this week should Wednesday’s inflation report compound the signal from the jobs data and lead markets to add to bets that the Fed won’t be able to cut until Q3, if at all this year. As we noted in our latest forecasts, should the US 10-year break through 4.5%, Japanese officials will likely need to put their money where their mouth is as markets will have a fundamental reason to take USDJPY through 152. Meanwhile, this week should see both the ECB and Bank of Canada set markets up for rate cuts in June, while President Lagarde and the BoC’s updated projections should favour a more dovish path for rates this year than markets are pricing. Coinciding with a higher US yield backdrop, this should see key levels tumble on some of the largest currency pairs within the DXY index. In this event, this week should also be significant for a lot of Asian currency pairs, which recently have been pinned in tight ranges by higher Treasury yields on the one side and central bank actions on the other. USDSGD is the prime example of this; the pair has threatened to break through 1.35, but has struggled to consolidate the move given it isn’t consistent with MAS’s monetary stance in the absence of fresh depreciation in JPY, CNY or EUR. With MAS set to maintain its policy stance this week amidst higher-than-expected core inflation and growth showing the economy can sustain the tighter policy stance, upside in USDSGD remains in the hands of its major trading partners. This is a similar story for a lot of USD-NJA pairs.
EUR
Bemusedly, the single currency closed last week above the 1.08 handle, even as US yields rose to their year-to-date highs and the move in spreads argued for a fresh downside break in the single currency. While Friday’s jobs data wasn’t enough to tip the balance in favour of the euro bears, we think this week’s economic calendar does. Should the US inflation data corroborate the signal from US payrolls and the ECB setup markets for a sequence of rate cuts from June onwards, the move in rates should set EURUSD on a path to our one-month and three-month forecasts of 1.07 and 1.05 respectively. Key to this view from the eurozone side will be the ECB’s press conference on Thursday, where we think President Lagarde will have to concede that the data supports the doves case for faster easing, and any corresponding “sources” stories that tend to get leaked simultaneously around contentious meetings. On the latter, we think this should once again support the doves case, especially as the official guidance from the ECB is likely to be one of complete data-dependence.
GBP
This morning’s REC report on jobs points to a further slowdown in the labour market in March, and is likely to fuel renewed calls for the BoE to deliver rate cuts next month. In short, recruitment activity slowed, labour demand fell even as the supply of candidates increased, and pay growth was recorded at the lowest rate in over three years. If the signal from today’s report is to be believed, inflation pressures stemming from labour market resilience should no longer be a concern, which would point strongly in favour of the BoE beginning to cut rates in May. That said, we are more circumspect in our view of the data, and we suspect the MPC will exercise a degree of caution too. Whilst official wage growth measures have come under scrutiny in the past year over data reliability concerns, we doubt they have been entirely discounted by policymakers. These, in contrast, show wage growth tracking at rates that are likely still too high for the MPC to feel comfortable cutting rates just yet, particularly with April’s rise in the national living wage on the horizon, and the BoE’s own Decision Maker Panel survey noting in March that employers expect to lift wages by 4.7% over the next year. We continue to think that this uncertainty favours August’s meeting as the start date for any easing from the BoE, though this will likely be followed by cuts at every meeting for the remainder of the year in light of labour market weakness. But risks look increasingly skewed to an earlier start to easing, a dynamic that is likely to weigh on sterling, despite this morning’s muted response in FX markets.
CAD
As we warned last week, Friday’s jobs data was of critical importance for USDCAD. Risks heading into the release were for a soft Canadian print to contrast sharply with a strong headline reading south of the border. With this ultimately playing out, USDCAD finished Friday having more than reversed losses from earlier in the week. That said, we continue to think risks for the pair are skewed to the upside, with plenty of room left for policy easing expectations to further diverge. Significantly, markets are projecting 2.9 rate cuts from the BoC this year, against 2.4 for the Fed. We think the BoC will need to ease much more than markets are implying, especially with the Canadian economy managing to lose 2.2k jobs in March, despite population growth running at roughly 3%. This in turn saw the unemployment rate jump to 6.1%, exceeding prerelease expectations for a more modest climb to 5.9%. What this should highlight for BoC policymakers in advance of this week’s meeting, is that a slow unwind in the labour market is now beginning to accelerate. While there is an argument to be made for the Bank to ease policy later this week, in keeping with the BoC’s more cautious approach, a June start to rate cuts looks more likely to us. That said, Bank staff forecasts are now all but guaranteed to skew dovish, with a significant downgrade to the inflation path likely. Combined with last week’s soft data, this should hammer home the message for markets that Canada is not the US. All told, this should see the loonie trading under pressure this week. We continue to look for USDCAD to trade towards the 1.38-1.40 range in the coming months.